The Consumer Financial Protection Bureau Goes to Bat for Consumers
The Consumer Financial Protection Bureau (“CFPB”), also known as the watchdog of consumers’ rights, went to bat yesterday for tens of millions of people who have lost their right to hold companies responsible for misleading them. The CFPB met at an Arbitration Field Hearing in Denver and announced its intention to protect consumers by prohibiting financial institutions, including banks, credit card companies and lenders, from forcing class actions into arbitration, until class certification is denied, or the case is dismissed. A duty to report any arbitration cases to the CFPB was also introduced.
According to the CFPB, this new approach is similar to that that of the Financial Industry Regulatory Authority for broker-dealer disputes which was approved by the U.S. Securities and Exchange Commission. According to Richard Cordray, Director of the CFPB, “Under this proposed approach, consumers would again get their day in court to hold companies accountable for potential wrongdoing.”
More and more companies are using forced arbitration as a standard business practice. In forced arbitration, a company requires a consumer to arbitrate any dispute that may arise as a prerequisite to buying a product or service. The consumer waives his or her right to sue, to participate in a class action lawsuit, and to appeal. There is no judge or jury, but rather, an arbitration panel that reviews the facts. Forced arbitration is mandatory and the decision is binding. According to Lauren Saunders, Associate Director of the National Consumer Law Center, “If a company violates the law, a judge should be able to order the company to repay all of its victims and not force each person to hire their own attorney . . . Class-action bans are a corporate get-out-of-jail-free card.”
According to a CFFB study, tens of millions of consumers are subject to this restriction on their rights to sue. This number is actually even greater, as the study only looked at financial contracts. According to Cordray, “Consumers should not be asked to sign away their legal rights when they open a banking account or credit card . . . Companies are using the arbitration clause as a free pass to sidestep the courts and avoid accountability for wrongdoing.”
Most consumers don’t even realize how many contracts contain forced arbitration clauses until it’s too late. The clauses are generally hidden in the fine print of agreements and contracts. Currently, approximately 48% of credit card contracts contain a forced arbitration clause. The study also found that arbitration clauses are included in the contracts of 86% of lenders that provide student loans, 88% of mobile wireless providers who use third parties to charge for consumer services, and about 44% of federally insured bank deposits.
The study found estimated that over five years, $2.7 billion cash was granted in class-action settlements benefitting 160 million Americans. In contrast, most consumers do not make it to arbitration and for those that do, relief is very limited. In 2010 and 2011, it was big business that profited from arbitrations forcing consumers to pay $2.8 million.
The CFPB will need some time to create a formal process for the new regulations, but the end is near. In his prepared remarks, Cordray wrote, “Although we are not proposing to prohibit the use of predispute arbitration clauses, we will continue to monitor the effects of such clauses on the resolution of individual disputes.” Executive Director of Public Justice, F. Paul Bland Jr. called the proposal for reform, “an enormous step toward protecting consumers.”
To view a fact sheet on the report: http://files.consumerfinance.gov/f/201503_cfpb_factsheet_arbitration-study.pdf
To view the complete CFPB report:
To view more information on arbitration clauses: